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60-Second Guide to Perfect Credit

About 1% of the population has perfect credit, meaning a FICO score of 850 on Fair Isaac's scale of 300 to 850. How they earned those gold stars is no secret. A quick peek into their credit files reveals that these star pupils haven't got any fancy tricks up their sleeves. Instead, they share such ho-hum traits as:

Between four and six revolving accounts (meaning credit cards).

At least one "installment" tradeline (e.g., a mortgage or auto loan) in good standing.

A few accounts around 20 years old with a long history of positive use. (To get into the 800 range, you need 10 years of positive account history.)

Around 30 years of credit use.

No late payments (or other account blunders) for at least the past seven years.

Very few credit inquiries (no more than one to three in a six-month period).

No derogatory notations -- collections, bankruptcies, or bad accessorizing. (Just kidding on that last one.)

Debt levels on credit accounts of less than 35% of their overall credit limit.

0:60: See what everyone's saying about youThree major credit-reporting agencies are keeping tabs on your financial comings and goings, and so should you. At least once a year (and certainly several months before entering any major loan situation), go to annualcreditreport.com and pull your rap sheets from Equifax, Experian and TransUnion. (You get one freebie from each bureau once a year.)

0:52: Fix the typosGiven that your credit record spans nearly a decade of your borrowing activity, it's no surprise that errors sometimes turn up. Some common credit-reporting blunders include out-of-date addresses, closed accounts being shown as open, and outright false information.

0:40: Mend your uncreditworthy ways, ASAPThose self-inflicted credit wounds (like a history of late payments, defaults, and generally bad behavior -- think back to your freshman year in college) will fade from your record over time. (You cannot wipe out accurate information from your credit report. Nor can any firms who offer to do so for a fee.) Since your most recent behavior carries more weight than old news, vow that from this day forward you will be a financial Goody Two-shoes.

0:25: Memorize the mantra: It's plastic, not cashA credit card is just that -- a credit card. Even though you've been deemed worthy by some entity (Target, Visa, The Puppy Palace) to borrow $34,538, you don't actually have $34,538 to spend, which leads naturally to the next rule ...

0:19: Ignore bankers' rules on what is an "acceptable" level of debtYour debt-to-income ratio is the measure of how much debt you carry to how much money (after taxes) you have coming in. In the world of lending, it is acceptable to carry 25% of your income in debt. That ratio is pretty high in our opinion. At the very least you want to keep your debt -- including car loans -- to 15% or less of your after-tax income.

0:07: Lather, rinse and repeatBased on what's in the Bo-Derek-of-borrowers' files, you can see that fancy maneuvers aren't necessary to keep your credit looking spiffy. Just keep your spending under control, pay your bills on time, don't apply for extra credit too often -- and don't be shocked when you find yourself among those with elite credit-score status.

Comments from our Foolish Readers

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Why is it that people who are in DEBT get a better score than I do? I own my home. I own other property in CO worth even more than my house! I have income, savings, and investments.

I own a Classic Nissan Pulsar SE 1987 and a nice RV. (My insurance company, Amica, cancelled my insurance, as they thought the car wasn't worth anything!??) I drove it over to Farmer's, and they insured it for $25,000.)

I DON'T OWE ANYTHING! I like interest, but only if **I** am making it! Why buy on credit? I grew up in the '30's and learned to SAVE for what I bought. It still seems to me like the best plan.

@jskdy, Good for you. Note that banks and credit card companies hate lending money to you because you always pay them back so fast that they don't make any interest. From a lender's perspective, the best candidate isn't someone who is super responsible like you (someone who avoids debt completely), they want someone who is irresponsible enough to take on debt, but responsible enough to pay it off over time.

People think having an 850 FICO score makes them responsible, I disagree. It might be responsible. But many of the most financially responsible people and the most financially sound people do not know their credit score. They don't borrow money because they don't like paying interest. Borrowing money and paying it off on time over and over again leads to giving the bank a lot of interest payments, which is a terrible thing to do (unless it is a business expense or something that leads you to make much more money). It will give you a good FICO score though.

This whole concept bothers me. I know I should care, but I have to conform to all the rules and my credit has to be perfect so that I will win the approval of banks / auto companies / finnance / etc. This takes effort, care and diligent detail. BUT........ But, all these institutions just caused the whole world to fall into a pit and walked away with huge profits doing this. I lost a great deal fo money. They judge my little effort and can make or break me. They INSIST on no rules, so that they can control what they do. I have to conform to these failures in business to get ahead. I don't like it. I have lost all respect for them and have to depend on them.

850 may be perfect for those that use credit, but in all reality an individual with a non existent credit file has probably lived life with zero debt. Many individuals that lived through the "great depression" never had trust in banks or ever used credit. These individuals never bought anything unless they could pay cash for it. I was raised by "depression era" parents. They were prolific savers and never had any debt.